Signs of hope for the car industry

Living on scraps

The worst may be over for carmakers, but they are still in for a long haul

CALL them green fumes. Sales of cars and trucks in America showed their smallest year-on-year decline last month since September, when Lehman Brothers crashed—although the drop was still a massive 31%. That would correspond to annual sales of 9.7m. But according to General Motors, the first three weeks of the month were a good deal better, running at a rate of 10.3m. Sales subsequently slowed as some customers held back in anticipation of the federal “cash-for-clunkers” scheme, which began this month.

Such incentives appear to be working well. Data released this week by J.D. Power Automotive Forecasting showed that during June, car sales in Western Europe grew by 4.1%. In Germany, which has the most generous of the many scrappage schemes in operation, sales were up by an astounding 40.5% for the month and 26% for the year so far. Monthly sales rose by nearly 12% in Italy and by 7% in France.

Although the American scrappage incentives apply from July 1st, buyers may hold back until the details of the plan are finalised later in the month. That could turn out to be good news for General Motors. This week's decision by Judge Robert Gerber to allow the “new” GM to acquire the good assets of “old” GM, following the example set by Chrysler's fast-track exit from Chapter 11, should ensure the emergence from bankruptcy of America's biggest carmaker within weeks. Having lost nearly two percentage points of market share during the bankruptcy proceedings, the new GM is planning a marketing blitz next month to announce its resurrection.

The industry is fearful about what will happen when the various scrappage schemes are phased out (all are limited either in time or funding). There is a widespread belief that the incentives, which range in value from about €750 ($1,050) to €2,500 and are only available to buyers with cars over ten years old, are only “pulling forward” demand and will thus enfeeble the recovery when it comes.

Sascha Heiden of IHS Global Insight, a forecasting firm, thinks the scrappage schemes in Western Europe will boost sales by about 1.2m this year and reduce them by 600,000 next year. But Max Warburton of Bernstein Research argues that most of the sales “are new and incremental, rather than pull-forward”, since customers with nine- to ten-year-old cars usually replace them with used instead of new ones. Mr Warburton believes that “normal” buyers of new cars will begin to return to the market next year as the economy improves. He expects Western European sales to be roughly stable in 2010, but with demand for bigger and more profitable vehicles replacing the artificial surge in demand for small, cheap cars.

There are other reasons for the industry to feel more optimistic. Inventories have now been almost fully depleted, paving the way for a jump in production in the last four months of the year. A pronounced increase in American vehicle sales, which fell by 40% towards the end of last year and have stayed at their lowest level since the 1970s, is a near certainty. Although rising unemployment will continue to act as a drag on the market, car loans, the lifeblood of the industry, have become available again, even to less-than-prime borrowers.

Mr Warburton also points to a recovery in profitability, thanks to falling raw-material costs, that should be worth as much as €500 a car next year. Nor should the positive impact on carmakers in both America and Europe of a radically slimmed down GM be underestimated. GM, says Mr Warburton, has been “the overriding deflationary force on industry pricing” for decades.

There is still uncertainty about when mature car markets will return to the kind of sales seen in the decade up to 2007 (according to IHS Global Insight it will not be for at least four years) and who will be the winners and losers among the big carmakers. But for now, it is enough that the worst of the nightmare seems to be over.